On August 1, 2018, a new Section, 18-217 was added to the Delaware Limited Liability Company Act, permitting a single Delaware LLC to divide into two or more Delaware LLCs. The original dividing LLC can continue to exist or terminate as part of the division.
A statutory division can be useful for several purposes including spinning off or selling a line of business.
Here are some things LLC owners, managers, or counsel who think a division could be beneficial may wish to know about this new statutory option.
Plan of division required
In order to enter into a division, a Delaware LLC first has to adopt a plan of division. The plan has to set forth the following:
- Terms and conditions of the division—including how the dividing LLC’s assets, property, rights, debts, liabilities and duties will be allocated among the new Delaware LLCs that will result from the division
- Name of each resulting LLC—and if the dividing LLC will survive the division, its name
- Name and business address of a “division contact” who will have custody of a copy of the plan of division and who, for a period of six years following the division, is required to provide any creditor of the dividing LLC with the name and address of the resulting LLC to which the creditor’s claim was allocated
- Any other matters the dividing LLC determines to include
Dividing LLC must approve the plan
The next step is for the plan of division to be approved. The plan is to be approved in the manner specified in the LLC agreement for approving a division. If there is none specified, then it is approved in the manner set forth in the LLC agreement for approving a merger or consolidation. If the LLC agreement is silent on the approval of mergers or consolidations, then the plan must be approved by members who own more than 50 percent of the then current percentage or other interest in the LLC’s profits.
File a certificate of division
After the plan is approved a Certificate of Division must be filed with the Secretary of State, which states the following:
- Name of the dividing LLC and whether it will survive the division
- Date the dividing LLC’s certificate of formation was filed
- Name of each LLC that will be resulting from the division
- Name and business address of the division contact
- Division has been duly approved
- Address where a copy of the plan of division is being kept on file, and that it will be furnished to any member of the dividing LLC upon request
If the dividing LLC will not survive, the Certificate of Division acts as a Certificate of Cancellation.
File certificates of formation
A Certificate of Formation must be filed for each resulting LLC, simultaneously with the filing of the Certificate of Division. A Certificate of Formation is required to set forth the LLC’s name, the registered agent’s name and registered office address. If the division is not to become effective upon filing, the Certificate of Division and each Certificate of Formation must have the same future effective date.
CT Tip: In addition to the filings required in Delaware to effect the division, filings may also be necessary in other states as a result of the division. For example, if the original LLC will not survive, filings would be required in all states where it was registered to do business as a foreign LLC to remove the LLC from these records. In addition, the resulting LLCs will have to register to do business in foreign states where they will be transacting intrastate business.
Effect of division
When the division is effective, each of the Delaware LLCs resulting from the division will be liable for the debts, liabilities and duties of the original dividing Delaware LLC as are allocated to them pursuant to the plan of division.
No other Delaware LLC resulting from the division will be liable for the original LLC’s obligations unless the plan of division constitutes a fraudulent transfer.
Debts and liabilities of the original dividing LLC that are not allocated by the plan of division will be the joint and several debts and liabilities of all the resulting LLCs.
For further information on LLC divisions, please consult Title 6, Sec. 18-217 of the Delaware Code.